Key takeaways
- Outside IR35, most limited company contractors take a salary through payroll and the rest of the profit as dividends.
- The usual 2026/27 salary choices are £12,570, £6,708 or £5,000; employer National Insurance is 15% above £5,000.
- A company whose only director is its only employee liable for employer National Insurance cannot claim the £10,500 Employment Allowance.
- Dividends are taxed at 10.75%, 35.75% and 39.35% above a £500 allowance, with no National Insurance.
- Inside IR35, the income is taxed as employment income: the fee payer deducts it before paying your company, or with a small client your company pays it through a deemed employment payment.
How you pay yourself as a contractor depends first on how each contract is taxed. Outside IR35, most limited company contractors take a small salary through payroll and the rest of the profit as dividends. Inside IR35, tax is taken before the money reaches your company. Through an umbrella company, you are simply paid a salary. Figures below are for the 2026/27 tax year.
Start with how the contract is taxed
| How you work | How you are paid |
|---|---|
| Your own company, contract outside IR35 | You choose: a salary through your company's payroll, plus dividends from the profit left after Corporation Tax. |
| Your own company, contract inside IR35 with a medium, large or public sector client | The fee payer deducts Income Tax and employee National Insurance before paying your company, and pays employer National Insurance itself. |
| Your own company, contract inside IR35 with a small client | Your company works out a deemed employment payment at the end of the tax year and pays the tax on it through payroll. |
| An umbrella company | You are the umbrella's employee and are paid a salary through its PAYE payroll. |
Our guide to IR35 explains who decides and how. The rest of this page is about the first row, where the choice is yours.
Choosing a salary
Three salary levels come up for a director who is the only employee. The 2026/27 thresholds are on GOV.UK:
| Annual salary | Why this level |
|---|---|
| £12,570 | The Personal Allowance and the employee National Insurance primary threshold, so no Income Tax or employee National Insurance. Employer National Insurance is due on the part above £5,000. |
| £6,708 | The Lower Earnings Limit, the lowest salary that still builds a qualifying year for the State Pension. No employee National Insurance; employer National Insurance on the part above £5,000. |
| £5,000 | The secondary threshold, so no employer National Insurance at all. Below the Lower Earnings Limit, so no qualifying year from this salary. |
Employer National Insurance is 15% above £5,000. A company whose only director is its only employee liable for employer National Insurance cannot claim the £10,500 Employment Allowance, so most one-person contractor companies pay it in full (Employment Allowance eligibility).
Salary and employer National Insurance are both deducted from company profit before Corporation Tax, which is why a salary above £5,000 can still come out ahead. Our guide to the optimum director's salary compares the three in more detail.
Taking dividends
Dividends are paid from the profit left after Corporation Tax. They carry no National Insurance. The first £500 each year is covered by the dividend allowance, and the rest is taxed at the rate for the band it falls in (GOV.UK):
| Band | Dividend tax 2026/27 |
|---|---|
| Basic rate | 10.75% |
| Higher rate | 35.75% |
| Additional rate | 39.35% |
Dividends sit on top of your salary when working out the band. The Personal Allowance is £12,570 and the basic rate band runs to £50,270 of income (GOV.UK). Corporation Tax is 19% on profits up to £50,000, 25% above £250,000, with marginal relief between (GOV.UK).
A worked example for 2026/27
A contractor's company has £60,000 of profit before paying the director, one director who is also the only shareholder, and a contract outside IR35.
- Salary £12,570. Employer National Insurance: (£12,570 less £5,000) at 15% = £1,135.50.
- Company profit after salary and employer National Insurance: £60,000 less £12,570 less £1,135.50 = £46,294.50.
- Corporation Tax at 19%: £8,795.96. Profit left: £37,498.54.
- All of it paid as a dividend. The salary uses the Personal Allowance, so the whole dividend falls in the basic rate band.
- Dividend tax: (£37,498.54 less the £500 allowance) at 10.75% = £3,977.34.
- Take-home: £12,570 salary plus £37,498.54 dividend less £3,977.34 = £46,091.20.
The figures assume no other income, no expenses beyond those already in the £60,000, and every penny paid out. Leaving profit in the company defers the dividend tax until it is paid. Try your own figures in the outside-IR35 contractor calculator.
You still need to run payroll
Paying yourself a salary makes your company an employer. It registers with HMRC, runs payroll, and sends a Full Payment Submission on or before each payday, even if it pays HMRC quarterly (GOV.UK). Dividends are not paid through payroll; they go on your Self Assessment return.
How GoForma helps
GoForma's Start Bundle, £88 a month, runs monthly payroll for one director and includes year-end accounts, the Corporation Tax return, FreeAgent and an IR35 review on every contract. The Operate Bundle, £128, adds VAT returns and the director's Self Assessment. Your accountant works out the salary and dividend split each year. See contractor accountants for the detail.
